These are tough times for oil companies. Even for a FTSE 100 giant like Shell (LSE: RDSB). Its shares were above £20 in January, but are currently trading nearer £10. Clearly, there’s potential to double your money from here. But can the Shell share price ever get back to £20?
Some companies in the oil industry have been hit even harder than Shell. For instance, oil services firm Hunting (LSE: HTG). Its share price plummeted so rapidly it was demoted from the FTSE 250 to the small-cap index in March. Could this be another candidate for a spectacular recovery?
Shell share price vs Hunting share price
Looking at the year-to-date performance, the Shell share price is down 54%. Meanwhile, Hunting’s shares have dropped a dizzying 64% from over £4 to not much above £1.50.
Of course, the price of oil has also slumped in the grip of the coronavirus pandemic. Having started the year at over $60 a barrel, WTI crude is currently around the $40 mark.
Furthermore, the near-term outlook isn’t great. Both the IEA and OPEC have recently downgraded their demand forecasts for 2020. The former expects a contraction of 8.4m barrels a day from last year, and the latter 9.5m.
The IEA also said it sees a “treacherous” path ahead, and OPEC suggested risks would remain “elevated and skewed to the downside” for the first half of 2021.
Creditable performances in unprecedented times
Shell posted adjusted earnings of $638m during this year’s extremely challenging April-June quarter (down 82% on the same period last year). Cash flow was also positive.
However, the company reported a statutory loss of over $18bn. This was due to non-cash impairment charges on revised assumptions about the outlook for the oil price and refining margins.
It was a similar story over at Hunting. A statutory loss due to hefty impairment charges, but the company telling us it traded at or near to break-even at the EBITDA level through the April-June quarter.
As such, I’d say both businesses performed creditably in a period that saw an unprecedented drop in global oil demand.
The Hunting and Shell share prices are cheap
It could take some time for the oil market to rebalance after the huge stocks build-up earlier this year. However, in the medium term, I can see the oil price migrating back to the pre-pandemic $60-a-barrel level. And a recovery in the Shell and Hunting share prices.
The market’s currently valuing Shell at 6.5 times its pre-pandemic earnings. It also offers a prospective 4.8% dividend yield, even after this year’s rebasing of the payout. Meanwhile, Hunting is trading at just 4.5 times its pre-pandemic earnings with a prospective yield of 2.5%.
I’d be happy to buy Shell and Hunting today for a medium-term recovery in the oil price. I reckon Shell’s shares could get back to £20, and Hunting’s to £4.
What of the long term?
Looking further ahead — by which I mean decades — the world is transitioning away from hydrocarbons towards cleaner fuels.
My colleague Rupert Hargreaves has recently written about Shell’s plans to become a global electricity supplier. He believes the shares could be a good bet for the long term.
I think a case can also be made for long-term ownership of Hunting’s shares. This is because it’s successfully metamorphosed a number of times since it was founded in 1870.